Capitalism is awesome

Chris Berg, a research fellow with the Institute of Public Affairs in Melbourne, has contributed a masterful little article to the Cato Policy Report. It is entitled "Why Capitalism Is Awesome," and it elegantly makes some very important points.

Writes Berg:

But the true genius of the market economy isn't that it produces prominent, highly publicized goods to inspire retail queues, or the medical breakthroughs that make the nightly news. No, the genius of capitalism is found in the tiny things -- the things that nobody notices.

He later explains:

Ikea's Billy bookshelf is a common, almost disposable, piece of household furniture that has been produced continuously since 1979. It looks exactly the same as it did more than three decades ago. But it's much cheaper. The standard model -- more than six feet tall -- costs $59.99. And from an engineering perspective the Billy bookshelf is hugely different from its ancestors.
In those 30 years the Billy has changed minutely but importantly. The structure of the back wall has changed over and over, as the company has tried to reduce the weight of the back (weight costs money) but increase its strength. Even the studs that hold up the removable book shelves have undergone dramatic changes. The studs were until recently simple metal cylinders. Now they are sophisticated shapes, tapering into a cup at one end on which the shelf rests. The brackets that hold the frame together are also complex pieces of engineering.

This is a reality that many find difficult to grasp. *What* is a particular good, *what* is a particular service, is actually something that a market economy can sometimes spasmodically frenziedly redefine. We all marvel at the invention of the cell phone, how IT changed our lives, making communications easier and cheaper and thus changing, profoundly, the way in which mankind consider the very concept of 'distance'. And yet, if you compare the Motorola DynaTAC and the iPhone they are different in so many substantial ways.

We tend to think that they are different in the sense that the newer is, well, newer, and thus more developed, better constructed, more advanced than the older one. Indeed, it is: but this process wasn't linear, it is not that the engineers that struggled with the then available technology to pull the DynaTAC from a hat actually had an iPhone in mind, and we moved towards that by approximation.

*What* is a good, *what* is a service is something always susceptible, in a market economy, to the input of new ideas on the part of producers and to consumers' feedback. It is the back-and-forth movement that provides for "the genius of capitalism" to be found in the tiny things--including the studs in a Billy bookshelf.

Knowledge is dispersed in society, as F.A. Hayek taught us, and it is this very dispersion that makes these advancements, big and small, possible. As we know, Hayek used "knowledge" in a much broader sense than theoretical, academically transmitted knowledge: information concerning specific situation of time and space, tacit knowledge, 'know how.' Sometimes even those who own it are unaware of this sort of knowledge; but it is precisely what lubricates and makes production easier, smoother, and better suited to satisfy demand.
We can say that the market economy miraculously mobilizes knowledge even for the tiniest things. For many of its critics, this makes a market economy the cheap utopia of shopkeepers. But those bona fide critics of the market that care about human well being may have a second look. Capitalism is awesome indeed.

Comments and Sharing

The very feature that makes capitalism awesome is the feature that too many people hate. The free market forces the businessman to make changes both small and great in order to survive. Failure is met with destruction and many people think they should be protected from that destruction.

Politicians provide short term protection to those that believe in the free lunch. The long term cost of those free lunches is extremely high. The amazing thing to me is not that the average person can believe in the free lunch but that, apparently, so do many economists.

I don't think Liberals and Libertarians differ so much in recognizing how "awesome" Capitalism is as in over whether Capitalism can sometimes be improved by regulation, Pigou taxes, etc, whether one is morally obliged to accept the income distribution that Capitalism generates, and whether these issues can be discussed on the basis of data and not pure principle.

Adam Smith argued that wealthy individuals and corporations were motivated by self interest, an "Invisible hand" was operating in the background ensuring that capitalist activities ultimately benefited the society. But these last few years have demonstrated that there is no invisible hand, unregulated markets have been a disaster for an average person.

Multinational corporations have treated the environment as a free resource, hence ravished the world and citizens of every nation live with the consequence of bad air, dirty water and pollution of all sorts.

I saw this and wrestled with it because to me a series of good ideas can be great but is not true genius. For example, let's say the ipad is a truly genius invention. Then, if what the author of this article is saying is true, at what point can either Google or Microsoft say that having made a series of improvements to their tablets has made them as equally genius as apple? Never. They will always be viewed as copycats.

And what about the idea no one notices these things? Did the author take a moment to add up the number of comments posted on Amazon about crayons? How about the number of people who then commented on the comments?

The genius of capitalism is that it allows for good ideas and genius ones, but a series of good ideas does not add up to "true genius".

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